PBOC may stay cautious on rate cuts, say analysts

Chinese monetary authorities appear to be cautious about adjusting the policy rates in the short term, so the benchmark lending rate may be left unchanged this month, analysts said on Tuesday.

The monthly report on China's benchmark lending rate, the one-year loan prime rate, or LPR, will be published by the People's Bank of China, the central bank, on Friday. It is possible the PBOC may leave the LPR unchanged at 3.85 percent. The five-year LPR may also stay unchanged at 4.65 percent, analysts said.

The one-year and five-year LPRs have been kept at the same levels since April 2020.

Wen Bin, chief researcher at China Minsheng Bank, said he expects policy rates will remain stable, while commercial banks' cost of deposits may continue to drop as financial regulators tightened rules on financial products like structured deposits and internet-based deposits.

Although the PBOC cut banks' reserve requirement ratio in July and thus helped lower financing costs in the banking system, the effect is not strong enough to push down the LPR in August, said Wen.

On Tuesday, the PBOC injected 10 billion yuan of liquidity into the interbank system through seven-day reverse repurchase agreements, carrying an interest rate at 2.2 percent, via its open-market operations.

It followed a similar liquidity injection of 10 billion yuan ($1.54 billion) via seven-day reverse repos on Monday and another 600 billion yuan in cash via medium-term lending facility, or MLF. The MLF interest rate also remained unchanged at 2.95 percent.

The seven-day reverse repo rate is usually seen as the short-term policy rate, and the MLF interest rate is regarded as the mid-term policy rate, the central bank said in its latest monetary policy report issued last week.

Unchanged policy rates will reflect the PBOC's "prudent" monetary policy stance, although the recent resurgence in COVID-19 cases may further drag down China's economic growth in August, following already weakened economic activities in July, stated a research note of Nomura Securities.

In Nomura's view, China's interbank liquidity conditions appear to have tightened slightly last week, compared with the preceding week, with the major real money market rates rising a tad. The weekly average funding costs of government bonds also increased slightly.

"There's no need for policy interest rate cuts," said Iris Pang, chief economist in China for ING Bank. "Because, the RRR cut has pushed down market lending rates, and another RRR cut is likely to happen in the fourth quarter if there are more incidents and dramatic policy actions."

Louis Kuijs, head of Asia economics at Oxford Economics, said: "We don't think policymakers have an appetite now for a significant easing of the overall macro policy stance.

"But we expect policymakers to be keen to avoid a sharp slowdown and to be more willing to take measures to support growth in the second half than in the first half."

Other than monetary easing, a big question is whether the government will change its plan on fiscal spending and move the schedule forward, said Zhang Zhiwei, chief economist of Pinpoint Asset Management.

Beijing planned to have government-led investment projects ready for launch around the end of this year. Without help from the fiscal side, China may see GDP growth slowing by the fourth quarter, said Zhang.